Everybody Wants Their Pound of Flesh (Negotiating with Buyers)

I recently wrote a post about negotiating with suppliers called “The End of the Mexican Road.”

The post talked about how to find the lowest acceptable price & terms in a deal through testing.

In the post I made clear that I believe that all negotiations should seek to find fair deals where both parties can feel good about the outcomes. But that doesn’t mean always just saying “let’s split the terms 50/50 down the middle.” Often that doesn’t make sense.

But what about when you’re negotiating with buyers and not suppliers?

This process is obviously very different as you will likely have much less leverage.

Most people claim to not want to deal with the hassles of negotiating. I think most of us feel this way, really. But it’s not a reality in business. While you may be able to offer a price & terms for your service and not ever negotiate (especially if you’re an Internet company that sells cheaply to small businesses over the web and without onsite support & service) – you’ll still likely have to negotiate on business development deals. So please see this post through that lens – at some point when you deal with larger companies: enterprise buyers, biz dev partners, VCs or one day acquiring companies – you’ll like encounter these negotiation issues.

I could sum up my negotiation mentality as a seller in one phrase that I’ve used as short-hand for my portfolio companies for years, “Everybody wants their pound of flesh.”

It’s short-hand for showing that despite our aversion to the process of negotiations – as buyers we’re conditioned to it and even rewarded for it.

Here’s what a big company negotiation looks like:

1. Your Primary Buyer
You obviously start your process with a primary buyer. This is the person who is sponsoring a deal with your company. You need to know that unless you’re selling into a CEO this person has a cast of characters behind her that need to approve her decision – even if she holds the budget.

And like it or not, one important way that she will be judged by others is her ability to commercially negotiate a deal with you. If she is seen to accept your initial offer on: Price, payment terms, service-level agreements, remedies for service problems, cancelation clauses, indemnities and all of the other terms of a standard agreement then she will be seen as weak.

So whatever terms you offer her, she will likely push back. She’s already built in an assumption that your first offer isn’t likely your best.

Yes, I know it would be much easier and frankly more pleasant to just be able to put in THE offer and say, “I know that most sellers (or biz dev partners) negotiate. We hate playing games so we don’t negotiate. Our offer is our offer.”

Good luck with that.

I swear after all these years I’ve tried just about everything including trying to cut to the chase with the, “no really, this is the deal we want to do” kind of offer.

People are genetically programmed to negotiate anyways.

And they have the incentives to show their colleagues and superiors that they got you to move from your original offer.

Everybody. Wants their pound of flesh. Everybody.

So as distasteful as it might be to you, you’ve got to build in a buffer into your negotiations. You’ve got to have some wiggle room on price and on terms. You’ve got to have both substantive points in which you’re willing to be flexible and also some “throw away” points you really don’t care about but which will become part of your negotiation.

If you don’t, I assure you that you’ll cut into muscle or lose deals for seeming inflexible (rather than the honest, non-gaming-playing executive that you were hoping to be).

2. Your IT Reviewer
So your buyer put you through the ringer to show her independence. She got you to drop price and include more licenses for free. She got you to offer free storage and discounted training. She got you to remove your 6-month cancelation clause (heck, you never really expected 6-months cancelation, did you?).

But now your deal needs to pass through IT. This is the “deal prevention” team in many big corporations. And not that I blame them. They’ve had years of business-unit managers buying software solutions they didn’t need and that eventually become shelfware. Or they have internal tools that they want you to use but you prefer the sexy tools offered on the market.

So IT will both chop your deal off at the knees and if they let you through they’ll extract their pound of flesh. They’ll push you on your uptime SLA, they’ll push for harsher penalties for non-compliance, they demand security reviews … heck – if you’re small enough they’ll push for “source code deposits.” That can be brutal.

If you leave no room for IT negotiations you’ll take an unexpected haircut.

3. Procurement (or Biz Dev Team or M&A Department)
Up until now you’ve done fine. Your business unit buyer isn’t used to negotiating software and if you won over the IT team with your prowess then you’re feeling pretty good.

Now it’s time for the real leg breakers. If you’re selling to small businesses they may not have a procurement team. But all large companies do. And when they get involved all of your non-standard terms go away. You get people who don’t care at all about “relationships” with you. All of your sales training techniques are useless to their procurement Teflon. Procurement departments are professionally aloof from sales processes.

I would have lines like, “if GoToMeetings is willing to sell for price X, why should I pay more for you?”

Me, “well, let’s look at the business case for our software implementation. We believe we’ll be saving you more than $1 million per year for 5 years and this was prepared by your team.”

Their bullshit meters are too finely tuned for that type of negotiation.

“I don’t care about that. I don’t want to pay more for your product than I pay for similar products.”

That’s their job. No procurement professional gets ahead by saying, “hey guys, I read their terms. This deal is actually pretty fair. Let’s just approve it.”

Everybody is judged and promoted based on their ability to extract their pound of flesh. In fact, if your primary buyer doesn’t champion you through procurement you’re pretty much screwed. You have to look for a buyer that knows that procurement will demand unreasonable terms and who wants to work with you badly enough that they’ll push procurement to be fair.

Still, procurement must be fed. They need some wins.

Biv Dev teams? Same. Born to negotiate and trade terms.

M&A? Do they want to tell the CEO that they bought you for your asking price? And no lock-in? No earn outs? No risk to you for non performance? Naw. M&A needs flesh.

4. And so on Down the Line
Your buyer’s boss. Have you ever met a boss who looks at an agreement and simply says, “Yeah, I’m fine with that. Go ahead!” And just wait until the legal department weighs in. You’ll have all sorts of terms added that you’ve never even heard of. Remember that clause about your customer doing a big press announcement about the deal? Not so much. The marketing department will cut that off at the pass. And then, of course, there’s the CEO or SVP if your agreement is large enough or if it’s an M&A transaction. Even the big boss want’s her piece of flesh.

So What do Do About it?
By now it is a small miracle that you still have a deal on the table. If you started the process with your “best & final offer” at this point your deal is probably upside down. As you get through the multiple stage-gates people will demand their toll – whether you have something you feel you can offer or not.

So start with your final position at your own peril. I know your gut would tell you, “Don’t play games! We all hate games!” we tell ourselves. Mine, too. But then there’s reality. The sooner you accept realpolitik the sooner you realize that the incentive structures of dealing with companies, organizations and political structures (not to mention human nature) requires you to play the game. It requires you to start with some fat in your deal.

  • Have some room to compromise on pricing. I usually recommend that you even signal to your buyer that there is probably some room there. Why? You don’t want to be knocked out early because your prices are way out of the ballpark. Let them know there’s probably some flexibility. Actually, if you realize their internal incentives you are ironically doing them a favor by having some fat on price.
  • Have some terms that you would love to win but aren’t wedded to. Perhaps it’s having your customer pay annually in advance when your goal is really monthly in advance. With your first buyer you might agree quarterly in advance. Somebody later will negotiate you down to monthly. And beyond that to monthly in arrears
  • Have some room in the SLA for the IT department, some room on legal terms for the legal department

After all, if everybody wants their pound of flesh, you’re screwed if you start with only muscle.

I know it sucks. The people most averse to this message are often young, idealistic professionals who haven’t yet realized the world works this way. Or hackers who want an ideal world in which you build beautiful software and people just pay what’s fair.

But don’t hang the messenger. I’ve seen this enough first hand to know that … the world just is the way it is. Organizations are not static. They’re filled with people, politics and incentives.

Happy negotiating.

 

  • http://www.justanentrepreneur.com Philip Sugar

    What  a great post.  So true.  I have been that idealistic guy.

    I actually lost a deal once because I wouldn’t come down.  The competitor who was more expensive and ended but being more expensive after discounting won.

    The buyer literally thought they got a better deal.  Paid more and our software was better.

    I think your point is right on, each person in the chain wants to show their worth in the chain by extracting better terms.

    I call it wringing the washrag three times.  Be prepared to have to negotiate three times.  Then you can actually stand firm and get the deal done.

    I would also say to prepare to push back after the third time to signal that they really have extracted their pound of flesh.  For me that’s not usually too hard because I do feel raw at that point.

    The lesson I’ve never learned is the get in low and nickel and dime them once they are dependent on you to your number.  But I’ve seen it played well.  My only rationalization is I’ve taken some of those deals away at renewal time.

  • http://blog.daryn.net daryn

    I’m sure this is a great post, Mark, but I’m too distracted thinking about that excellent looking jamón in the photo to focus :) 

  • http://twitter.com/JasonWesbecher Jason Wesbecher

    Spot on, Mark.  As a professional seller, I’d add a couple of additional points.  First, never assume that your most important term (which is typically price) is also the buyer’s most important term.  Often times “risk” is the issue that the buyer is primarily trying to mitigate, which can be addressed through a variety of mechanisms (SLAs, source code escrow, etc).  Figuring this out early on in the cycle can help you save time, energy and margin. 

    Second, (this may sound silly) I often establish the starting price as an “odd” number.  Instead of leading with a price of $2 million, for instance, I will open with $2.179 million.  It sends a subtle message to the buyer that the price was arrived at rather scientifically as opposed to a guess as to what you think you can get from the buyer.

    Third, the picture is making me hungry.

  • http://twitter.com/robbieab Robbie Abed

    awesome post, and so true. When I was director of IT for an organization, it was a must for us to negotiate the terms & pricing regardless. It also made me look better to our CFO that I was able to get better terms & pricing even if we didn’t know what the benchmark was.

  • http://bothsidesofthetable.com msuster

    re: “The lesson I’ve never learned is the get in low and nickel and dime them once they are dependent on you to your number.” … yeah, this is the one strategy I want to hate and want to believe it doesn’t work. Unfortunately it does. Customers seem attracted to the low price and never properly price in future change orders. When in a sales competition you need to look out for this from the competition.

  • http://bothsidesofthetable.com msuster

    ;-)

    I was trying to think about what image would best represent “pound of flesh” – was so hard to come up with one.

  • http://bothsidesofthetable.com msuster

    Yeah, I never recommend using round numbers for the same reason. If you have precise numbers you need a way to back them up through calculations and justifications.

    re: finding out what the buyers true needs are … totally agree. And I usually just ask.

  • http://sandersak.com/ Adrian Sanders

    To me, bullet point 4 is the real big one.

    I always try to quickly identify the HiPPO (highest paid person’s opinion) and work from there.

    I’ve seen too many deals that get nixed from the top, regardless of what everyone (and I mean everyone on both sides) thinks. 

    If you can align your sale with the HiPPO and, in the best scenarios, actually get them to have ownership over the idea of how this will work, then the sale is a lot more fluid. 

  • http://www.docracy.com/ Matt Hall

    Maybe the most valuable thing for me in this post is that other people don’t like this process either, and that’s ok. In addition, I hadn’t really considered before the idea that the other party would need things out of the transaction other than just a fair final price. Understanding that fact wil probably make the process less personal and stressful for me in the future.

  • http://bothsidesofthetable.com msuster

    ha. exactly.

  • Greg Mand

    Another great post Mark. You highlighted a number of points that I have seen time and again. Big believer in the “have a list of items you are not wedded to in the deal.” Used to work in the U.S. for an Australian company and since we were not (then) a legal sub, all of my biz dev agreements were legal jurisdiction in Australia. Took a long time before HQ would accept NY or CA jurisdiction but they insisted I keep Australia in the deal as a starting point.  Inevitably, jurisdiction issue came up for U.S.-based partners but it became an easy deal point on which I could compromise.

  • Matt Cameron

    Mark, I would add that a trap many people fall into is having the same points negotiated twice and dying the death of 1000 cuts.  You make the very valid point that everybody needs a win, and in particular I would encourage people to not get into hard negotiation points without having the right people in the room.  Specifically, never get into pricing, SLA and terms negotiations with the business unless you have procurement in the room.

    I have been witness to several situations where the business takes a pound and then procurement (with no thought for relationship) weighs in and takes another pound… Leaving you with meager scratchings of the once delectable Spanish ham.  

  • http://www.zedscore.com Zeshan Ghory

    Great article – I’d be curious to know if any startups selling to enterprise clients have managed to stick to a no-discounts line. I believe Salesforce tried this at the start but it didn’t last too long. Even for their cheapest tier you can still negotiate with the salesperson. Everyone wants a deal.

    Having at various points sat on both sides of this particular table, I wrote a blog post last year with pointers on B2B enterprise sales for people new to the game - http://www.zedscore.com/2011/07/b2b-enterprise-sales-view-from-inside.html

  • http://www.zedscore.com Zeshan Ghory

    I was reading this on the tube in to work this morning, and caught the lady sitting next to me staring at the picture presumably wondering if I was reading some blog about butchery…

  • Jack

    Good post, as always. 

    Pure endurance is what I find hardest in the long negotiations  - the ones where everyone’s locked in a conference room with the lawyers and each and every little point is being haggled.

    Jack

  • Paul McTaggart

    Mark:

    You nailed IT being the ‘department of NO’!

    I’ve worked inside and outside of IT over the last 20 years and seen IT kill many deals.  Do not forget about PCI certification, SAS 70 certification, threat audits…sadly they kill small start-ups every time :(

    I remember in the 90s when IT was the champion of new technology….now they believe they have earned the right to kill a deal.  IT has started to act more in their own self interest (once bitten, twice shy) than the interest of their business stakeholders or dare I say the end customer!

    Paul

  • Matt Miesnieks

    Great series on negotiating Mark, I agree with the pound of flesh metaphor. 

    Three extra key points which you may help:

    1. View the negotiations as TRADING. When asked for a concession, ask for a concession in return. You have to know their concerns well enough to ask for what they care less about. This also creates the perception that they have you “to the bone” and they are getting a good deal (after you’ve given one or two concessions “for free”).

    2. Time is the enemy. If you have even basic negotiating skills you can get a deal done. It’s very hard to get a deal done IN THE TIME YOU NEED IT DONE. Often it’s better to just take a hit & concede in order to get it done now & move on.

    3. You should expect that by the time the deal is almost done, you will be so over the negotiating that you’d be just as happy to walk away & not do the deal. This is a good sign that you’ve reached a compromise where both sides are equally unhappy with the deal.

    and a bonus…. always always ALWAYS negotiate with the implementation in mind. Large deals are rarely a commodity transaction. Done poorly this leads to nickel & dime’ing, done well it leads to a successful and increasingly profitable long term relationship.

  • http://www.bluecoastrecords.com/ Cookie Marenco

    Thanks, Mark, always timely advice.  I could use an opinion (without my mentioning names).   We’re operating with a 5 person team that carries about 10 top “advisers” who are patiently waiting in the wings for some kind of deal to happen. 

    We’ve been in a courtship with a multi billion company who is well established in the consumer products world.. possibly a perfect match and perhaps too early for us to understand what it means to be involved.  The courtship dance involves “I’ll do this, if you do that” and so far doesn’t involve a $$$ transaction but has brought both companies great promotion and some sales. 

    There have been hints that I should make a proposal for greater involvement, but I have no idea what they want and culturally, I feel it might be a mistake for me to ask.    I’ve been patient for more than a year and feel the time is closing in to pop the biz dev question and expand.  How do you translate exchange of favors into a biz dev deal possibly in the millions?

    My inexperience is really showing, I know.  I’m wrestling with risking the existing relationship by  proposing too early.  Do you start with a small proposal first?  or go big?

    Sorry, if this isn’t exactly inline with your subject, but these are the kinds of negotiations that have stumped me in the past, too. 

    Thanks, Mark, you are a great example and teacher! 

  • http://pulse.yahoo.com/_GCDQVWT5STS35DVEUJNJ2DEY4Y Jason

    Great post.  This is why IMHO once you hit $xm in sales, you need a great VP Sales.  They are all good at this.  Founders aren’t.

  • http://twitter.com/Sokratis Sokratis

    Great post! I found the “These are the terms. We believe they’re fair and we don’t like to negotiate” technique used by the buyer as well. Easy to believe they’re being honest when you’re  young and idealistic :-)

    My biggest mistake as a founder was not investing enough time to prepare for the first meeting.

  • http://bothsidesofthetable.com msuster

    lol

  • http://bothsidesofthetable.com msuster

    I like that. HiPPO. The opposite of my NINA (No Influence, No Authority) blog post. http://www.bothsidesofthetable.com/2009/06/28/ninas-and-egg-breakers-pitching-a-vc/

  • http://sandersak.com/ Adrian Sanders

    So, when you hunt big game, go for HiPPOs and stay away from NINA? ;)

  • http://bothsidesofthetable.com msuster

    thanks, greg. yes, this does come up often.

  • http://bothsidesofthetable.com msuster

    “never get into pricing, SLA and terms negotiations with the business unless you have procurement in the room.” … great point. Where possible. Often procurement won’t engage until they feel a deal has mostly been agreed. That’s what happened to me from our mutual former employer when I first wanted them to sign a commercial contract.

  • http://bothsidesofthetable.com msuster

    People who still do it tend to be “sell ‘em really cheap and make it up on volume” type of companies. Works in some situations, not in others.

  • http://bothsidesofthetable.com msuster

    sometimes IT is the bad guy for the wrong reasons. But other times they’re there to protect the organization who has distributed buyers of technology who are bamboozled by sales people. So I have some empathy for them. Not always easy.

  • http://bothsidesofthetable.com msuster

    great points, all. Thank you.

  • http://bothsidesofthetable.com msuster

    Number one recommendation – have an in-person meeting with them and ask them what they’d like to achieve out of the relationship. Have some ideas & data in advance. But basically go to ask prompting questions and listen. Customer / partner input is the best source of figuring out “what’s in it for them?” good luck. 

  • http://www.bluecoastrecords.com/ Cookie Marenco

     Thanks, Mark!  Much appreciated.  It seems not that much different than a producer/label/artist relationship.  I must get spooked by the dollar amounts and the corporate speak that I’m not good at….  but then, I guess they already know I don’t do corporate speak and we’re still involved.  Prompt questions and listen… will do!  :)

  • CMKelly

    Last week I happened to catch “Shark Tank.” (My mom calls them “loan sharks,” which seems more on-target than calling them venture capitalists.) Mark Cuban offered one of the people pitching exactly what she asked for. The other sharks were stunned. “He didn’t negotiate at all!” Amazing how much it disturbed them (which might be why Cuban did it in the first place). The show did demonstrate a lot of the points you make here.

    This is a great post, and very timely, because my little startup is about to approach a NASDAQ-listed company with a proposal. Even though we’ll be talking to the CEO, and they’re not especially big, they’re what you might call a very frugal company, so I’m sure we’ll encounter a lot of the situations you illustrate. Now we’ll be better prepared. Thanks for the tips!

  • ryanmeinzer

    Thanks Mark, awesome post! I love the metaphor.

  • http://pilotincanada.com/ how to become a pilot

    I’m on my way to the Keg in 15 minutes because of this post :)

  • http://www.author-it.com/ Steve Davis

    Awesome Mark. This is absolutely the lay of the land negotiating enterprise deals in the US. Having founded our business in New Zealand and expanded into the US we had an idealistic (no BS) attitude to doing deals. We had some notable successes standing our ground with procurement in Fortune 100s but only becasuse we had business units desperate to have our software.

    Especially since the financial crisis we have found deals take longer to negotiate and we have to be aware of each step laid out in your post. We now have a sales process that builds these steps into our interactions with our prospective clients. Long and short of it is… being aware and prepared means that negotiations can “enable” a deal happening by proactively addressing the requirements of the buyer.

    Cheers Mark… keep em’ coming!

  • http://elamadej.com/ Ela Madej

    A great post and use of meat/fat analogy. I have little idea on corporate sales and selling to bigger organizations but all sounds pretty obvious/intuitive when you put it this way. Seems that to be successful in that process one needs to understand the big picture (i.e. how the organization works and what are the politics inside that org) + what motivates people you talk to (psychology). 

    An extra +1 for mentioning realpolitik (good ol’ Bismarck). 

  • Kutasi

    Well Mark, that was another great blog!  Your article inspired my most recent blog about buying a car and how TruCar crushes the negotiation process.  Let me know what you think: 
    http://blog.propflow.com/2012/02/28/negotiating-and-the-fixed-price-model/

    From negotiating for a blanket in the streets of Mexico (“The End of the Mexican Road“) to substantial transactions like the purchase of a home, people often feel uncomfortable about negotiating and would rather have a fixed price.  Yet there is often an inherent feeling one MUST negotiate on some purchases – e.g. remodeling a bathroom or buying a car.Last year I bought a new BMW wherein I had to negotiate i) the sale of my previous car and ii) the purchase of the new one.  During both transactions, there was that inherent battle between fixed pricing and the desire to negotiate…

  • http://www.justanentrepreneur.com Philip Sugar

     I tried and sadly it doesn’t work.

  • http://www.justanentrepreneur.com Philip Sugar

    I think Mark is right, and not knowing your situation my advice is worth what you paid for.

    One of the hardest things to do for people not used to selling is to muster up the courage and ask the tough questions:  Do you have a budget? is this really something you want, etc. 

    We’re afraid to hear a no, but we forget the only way you get to a yes is by embracing no.

  • Saul_Lieberman

     

    Then there’s the buyer who doesn’t know what a good cut of
    beef is. His only guide to a good deal is to hear you cry out in pain. So
    prepare the pound of flesh and be ready to cry about it.

    I would also note that while “the incentive structures of
    dealing with companies, organizations and political structures (not to mention
    human nature) requires you to play the game,” if you find yourself in a
    situation without those structures, you might be able to avoid playing games…
    subject of course to human nature. But if you can recognize those opportunities
    (without fooling yourself), you just may create a lasting and powerful
    relationship.

  • http://www.danspinato.com/ SanDiegoChiropractor

    This is such a great realization. Real life. The important point is that creating a deal is not about imposing your will on another. It’s about understanding what you share in common, and bridging the remaining differences in a way that will allow both parties to feel that the result is fair. 

  • http://www.lawnotes.com D. C. Toedt

    I don’t know what happened here — my short, readable paragraphs above were merged into mush ….

  • Abduba Guyo

    Great Post…